Auto Advertising & Marketing Expenses Becoming More Variable
Merrill Lynch Auto Analyst John A. Casesa recently made the following observations about advertising spending by the automakers:
Auto manufacturers' U.S. advertising spending will increase 4% to 5% in 2002 and by only 2% to 3% in 2003.
Three key factors are driving auto spending:
1. The industry's consensus expectation for flat to modestly down demand.
2. Heavy new product launch activity.
3. Continued intense incentive activity.
Although most OEMs (original equipment manufacturers) plan steady to increased spending in 2003, it is also clear that should a traditional downturn develop — demand down 5% or more — advertising budgets will be cut.
Media mix changes include a long-term shift from the networks to cable, the growing importance of the Internet, risks to broadcast media from digital video recorders (DVRs) and nontraditional advertising approaches like product placements.
As the U.S. vehicle market's structure continues to shift from an oligopoly dominated by GM to a "free-for-all" characterized by converging market shares, oversupply and shortening product cycles, advertising and marketing expenses (which account for 15% or more of revenues) appear to have become more variable and less fixed.
Finally, add advertising to the list of factors that will conspire to pressure auto earnings next year, along with pension expenses, steel prices and labor costs.
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